Let’s use a behavioural insight to tackle climate change

An approach based on the SC’s climate ruling combined with nudge theory could deliver results

is a professor of analytics and finance at the Centre of Excellence for Sustainable Development, Great Lakes Institute of Management, Gurgaon.

In a remarkable judgement delivered on 6 April 2024, a day that should stay marked memorably on our calendar, the Supreme Court of India (SC) recognized that “….the people have a right against the adverse effects of climate change.” And that “this right and the right to a clean environment… [is] necessary to articulate... as a distinct right. It is recognised by Articles 14 (right to equality) and 21 (right to life).” The SC judgement clearly spells out that the right to health (under Article 21) is impacted by factors that degrade the environment.

It is not only the judgement of 6 April, but the manner and context in which it was made that is of particular significance. The country’s top court was due to hear a case related to the survival of an endangered species, the great Indian bustard. The case was posted for hearing in August, but the broad climate-change judgement was uploaded on the court’s website months ahead of it. The ruling sends out an important signal by recognizing a clean environment as a basic right and not a market-determined outcome. However, we need ‘glocal’ (global and local) commitments and actions to treat a clean environment as a basic right.

While markets can solve complicated problems, ‘market failures’ often make outcomes worse than what would have been the case if market solutions had not been relied upon. The risk of market failure and its potential consequences are even larger with carbon markets, given the nature of the ‘product.’ Consider a carbon-credit market, a trading system in which carbon credits are bought by entities that have positive greenhouse gas (GHG) emissions from others who remove these air pollutants. As with most markets, this mechanism, deployed under a policy that exerts CHG reduction pressure on all entities, punishes polluters by making them pay for emissions and also incentivizes organizations to capture these gases. Thus is the price mechanism expected to deliver an optimal path to net-zero emissions.

However, as we are already way beyond permissible GHG levels, the crucial question is whether we can afford to rely on a market mechanism to optimize reductions. For one, cleaning the environment will always fall badly short of emissions. Global emissions data highlights the precarity of it.

If one plots GHG emission levels on a graph, globally as well as for India, expressed as 1,000 tonnes of carbon dioxide equivalent per year, as well as India’s share in the global total, two facts would emerge. One, despite efforts and agreements, no dent has been made in the world’s total emissions. Two, India’s contribution, both in terms of absolute emissions and its global share of them, is quite low. The numbers highlight the familiar North-South global divide and raises the question of inequitable climate-action burdens.

Unless strictly enforced and fast-dropping limits are imposed by policy on overall emissions within various markets, larger market mechanisms could worsen that inequality. Activities that boost economic growth and create wealth will continue to sustain emissions, while raising the purchasing-power of emitters to buy more carbon credits. The result would be higher emission levels overall, and low GHG emitters might find carbon credit prices raised by demand and thus less affordable. A price mechanism for emissions cannot succeed through market forces without decarbonization policies acting as the primary force on all polluters. This exposes the idea to the risk of failure. Perhaps a more effective way to cap GHGs is to go beyond economics and treat emissions as a violation of others’ rights. Is there a good way to reduce GHG levels for each country?

Richard Thaler, a Nobel laureate in Economics, has made some behavioural observations that may be useful. He asserts that the design of contracts may yield drastically different outcomes even if the eventual payoffs are identical.

To illustrate this, he offers a simple experiment. Consider someone trying to quit smoking. He can opt for either of two disincentive schemes: One, leave $100 with a friend and at the end of the day get back an amount of $100 minus X, where X is the number of cigarettes he smoked throughout the day. Alternately, the person can pay his friend amount X if he smokes X cigarettes during the day. While the cash penalty imposed in both cases is exactly the same, X, Thaler observes that the first mechanism reduces the number of cigarettes smoked much faster than the second. There is a lesson in this if we want to honour our commitment to reduce GHG emissions.

A mechanism should be devised that calculates before the beginning of every year the GHG reduction each country must necessarily achieve. A monetary equivalent of the same should be paid by respective countries into a global pool. Then, depending upon the actual GHG emissions throughout the year, the balance would be credited back to the country from that global pool. Commitment amounts for every country can be drawn from historical as well as projected GHG emission levels. In a democratic set-up, explaining to citizens why the government cannot recover a sum pledged at the start of the year will probably prove far costlier than explaining why a fine must be paid.

If countries consider the right to a clean environment a basic right, they must adopt processes that actually enforce this right. Ex post penalties could come later. This is what a ‘rights’ guarantee is all about. It can’t be infringed and then compensated for later. India has made all the right noises. We now await actions that can show others the way.